PetMed Express Inc (NASDAQ: PETS) Q4 2019 Earnings Call Transcript

PetMed Express Inc (PETS) Q4 2019 earnings call dated May. 04, 2020

Corporate Participants:

Bruce S. Rosenbloom — Chief Financial Officer and Treasurer

Menderes Akdag — President, Chief Executive Officer and Director

Analysts:

Erin Wright — Credit Suisse — Analyst

Kevin Ellich — Ace Research LLC — Analyst

Anthony Lebiedzinski — Sidoti & Company — Analyst

Ben Rose — Battle Road Research — Analyst

Presentation:

Operator

Welcome to the PetMed Express Incorporated Doing Business as 1800PetMeds Conference Call to Review the Financial Results for the Fourth Fiscal Quarter and Year-Ended on March 31, 2020. At the request of the Company, this conference call is being recorded.

Founded in 1996, 1800PetMeds is America’s largest pet pharmacy, delivering prescription and non-prescription pet medications and other health products for dogs, cats, and horses direct to the consumer. 1800PetMeds markets its products through national advertising campaigns, which directs consumers to order by phone or on the Internet and aims to increase the recognition of the PetMeds family of brand names. 1800PetMeds provides an attractive alternative for obtaining pet medications in terms of convenience, price, ease-of-ordering and rapid home delivery.

At this time, I would like to turn the call over to the Company’s Chief Financial Officer, Mr. Bruce Rosenbloom.

Bruce S. Rosenbloom — Chief Financial Officer and Treasurer

Thank you. I would like to welcome everybody here today. Before I turn the call over to Mendo Akdag, our President and Chief Executive Officer, I’d like to remind everyone that the first portion of this conference call will be listen-only, until the question-and-answer session, which will be later in the call.

Also, certain information that will be included in this press conference may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 or the Securities and Exchange Commission that may involve a number of risks and uncertainties. These statements are based on our beliefs, as well as assumptions we have used based upon information currently available to us. Because these statements reflect our current views concerning future events, these statements may involve risks, uncertainties and assumptions. Actual future results may vary significantly based on a number of factors that may cause the actual results or events to be materially different from future results, performance or achievements expressed or implied by these statements. We have identified various risk factors associated with our operations in our most recent Annual Report and other filings with the Securities and Exchange Commission.

Now, let me introduce today’s speaker, Mendo Akdag, President and Chief Executive Officer of 1800PetMeds. Mendo?

Menderes Akdag — President, Chief Executive Officer and Director

Thank you, Bruce. Good morning. Welcome and thank you for joining us. First, we hope you’re doing well and staying safe and healthy during these challenging times. Due to COVID-19, our consumer demand has been strong for e-commerce with pet owners shifting their purchases to online. Our sales have been positively impacted due to this increased demand, combined with the start of our peak season.

As an essential business, we have been open during our normal business hours without any material disruptions in our operations. We are dedicated to making every effort to ensure pets get the medications they need. We have also taken measures to ensure the health and safety of our employees. We have implemented working-from-home where possible and enhanced disinfection of our workplace.

We have repeatedly been stressing to our employees the need for social distancing and proper hygiene practices at home and at work. We’ve transitioned in-person meetings to online and we have not been permitting any non-employees on our premises.

Also, so far, we have not seen any material disruptions in our supply chain. But the situation has been fluid, changing day-by-day. We’re monitoring and managing it closely.

Now, we will compare our fourth fiscal quarter ended on March 31, 2020, to last year’s quarter ended on March 31, 2019.

For the fourth fiscal quarter ended on March 31, 2020, our sales were $74.3 million compared to sales of $64.6 million for the same period the prior year, an increase of 15%. The increase in sales for the quarter was due to increases in reorder and new order sales. The average order value was approximately $90 for the quarter compared to $85 for the same quarter the prior year.

For the fourth fiscal quarter, net income was $7 million or $0.35 diluted per share compared to $6.6 million or $0.32 diluted per share for the same quarter a year ago, an increase to diluted earnings per share of 8.4%.

Reorder sales increased by 17% to $65.2 million for the quarter compared to reorder sales of $55.9 million for the same quarter of the prior year. New order sales increased by 5% to $9.1 million for the quarter compared to $8.7 million for the same period of the last year.

We acquired approximately 107,000 new customers in our fourth fiscal quarter compared to 101,000 for the same period of the prior year. The seasonality in our business is due to the proportion of flea, tick and heartworm medications in our product mix. Spring and summer are close to the peak season with fall and winter being the off-season.

For the fourth fiscal quarter, our gross profit as a percent of sales was 29.2% compared to 32.1% for the same period a year ago. The percentage decrease for the quarter can mainly be attributable to increases in product cost and additional discounts given to customers in response to increased online competition.

Our general and administrative expenses as a percent of sales was 8.6% for the quarter compared to 9% for the same quarter of the prior year. We were able to leverage the G&A with increased sales. For the quarter, we spent about $6.2 million in advertising compared to $6.5 million for the same quarter a year ago. The decrease for the quarter was primarily due to a reduction in television advertising.

Advertising cost of acquiring a customer for the quarter, defined as total advertising expenses divided by total new customers acquired, was approximately $58 compared to $65 for the same quarter of the prior year.

We had $103.8 million in cash and cash equivalents, $17.9 million in inventory with no debt as of March 31, 2020. Net cash from operations for the fiscal year was $38.8 million compared to $45.1 million for the prior fiscal year. The decrease was due to lower net income offset by decreases in inventories and increases in accounts payable compared to the prior fiscal year. Capital expenditures were approximately $2.3 million for the fiscal year.

This ends the financial review. Operator, we are ready to take questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And first, we have Erin Wright from Credit Suisse. Your line is open.

Erin Wright — Credit Suisse — Analyst

Great, thanks. Based on the order mix, basket size, customer profile, other metrics that you track, how sticky would you think that this COVID-driven customer base will be?

Menderes Akdag — President, Chief Executive Officer and Director

We are assuming that it’s going to be same as what it has been historically.

Erin Wright — Credit Suisse — Analyst

So, you don’t anticipate that there was any outsized stockpiling?

Menderes Akdag — President, Chief Executive Officer and Director

There could be, that’s a possibility. And we had campaigns, encouraging buying higher volume and we were also cross-selling. So, probably it’s half-and-half. So, there could be some stockpiling.

Erin Wright — Credit Suisse — Analyst

Okay, all right. Thanks. And then, have you seen any changes in the parasiticide ordering patterns, whether it’s across OTC or prescription products, do you anticipate a change in ordering patterns maybe because of COVID or because of the flea and ticks season in general this year? I mean, if you could provide any sort of color there, that would be great. Thanks.

Menderes Akdag — President, Chief Executive Officer and Director

I would say flea and ticks season started a little earlier this year, probably end of February, beginning of March. So, the weather was warmer, so that might have positively impacted the numbers also.

Erin Wright — Credit Suisse — Analyst

Okay, all right. Thank you so much.

Menderes Akdag — President, Chief Executive Officer and Director

You’re welcome.

Operator

Thank you. Kevin Ellich from Ace Research. Your line is open.

Kevin Ellich — Ace Research LLC — Analyst

Good morning. Mendo, new customer sales increased about 6% this quarter, the first time in about eight quarters. Clearly, as Erin pointed out, maybe some stockpiling going on. But do you think that’s also a sign that the competitive environment is finally leveling off?

Menderes Akdag — President, Chief Executive Officer and Director

Prices stabilize in the markets with manufacturers forcing MAP policies. So, we’ve been price competitive and that probably helped. And also, demand for e-commerce, as we pointed out, has been strong.

Kevin Ellich — Ace Research LLC — Analyst

Okay, that’s helpful. And then gross margin, you made the comment about — I think you said there was then some of the campaigns and also increase in product costs; do you expect gross margin will continue to ramp in fiscal ’21, especially as you have some new parasite products online, as you compare to sales [Phonetic] now available on your website, I’m just curious if you can give us any color how it’s been doing in the first few days or your first few weeks as you’ve been offering it?

Menderes Akdag — President, Chief Executive Officer and Director

It depends really on the product mix. The OTC sales have been going up, too, lately. So, it’s really going to depend on the product mix. We will know in a couple of quarters where the gross margins will end up.

Kevin Ellich — Ace Research LLC — Analyst

Okay. And then, I know this might be a tough one, but with new customer sales increasing, is there any — have you guys taken a look, is there any specific geography where you’re seeing an increase or a surge in sales? And then, what about customers that used 1800PetMeds three, four, years ago, stopped, and now, are you seeing any of those people come back?

Menderes Akdag — President, Chief Executive Officer and Director

Yes, we are seeing some of our customers that has not purchased from us in a while has been coming back, we have seen that. It’s the big states, seven states, the seven — top-seven, eight states has been strong. But there is not, I would not say there is a material difference between states.

Kevin Ellich — Ace Research LLC — Analyst

Got it. And then lastly, it looks like — clearly, we’ve seen increased pet adoptions, animal shelters are pretty empty now. So, just wondering how you think that’s going to affect your business going forward? I mean, I would imagine that’s going to be a positive for the industry and your business. Just wondering if you guys have noticed that as well?

Menderes Akdag — President, Chief Executive Officer and Director

It should be a positive for us, so we’ll see what happens.

Kevin Ellich — Ace Research LLC — Analyst

Okay, thank you. Have a good day.

Operator

Thank you. Next we have Lebiedzinski from Sidoti & Company. Your line is open.

Anthony Lebiedzinski — Sidoti & Company — Analyst

Good morning and thank you for taking the question. So, I joined the call late, so maybe you already addressed this. But I just wanted to get a sense maybe if you could give us a little bit more color as to the sales acceleration that you saw? I guess, if you could just step back and look at your business before the COVID-19 outbreak and afterwards, if you could just kind of give us a sense as to the magnitude of the change in the sales?

Menderes Akdag — President, Chief Executive Officer and Director

Right. Increased demand for e-commerce and start of our peak season coinciding, positively impacted our sales.

Anthony Lebiedzinski — Sidoti & Company — Analyst

Got it, okay. So, just wondering if with more states opening up their economies now, I mean how should we think about the impact on your business from a demand perspective, obviously during March and I guess most of April, there was this big surge in demand, so anything e-commerce related? But as things start to get back to normal, what could — what kind of impact would you foresee on your business?

Menderes Akdag — President, Chief Executive Officer and Director

Well, demand still is strong so far for e-commerce. So, we’ll see what happens when the country opens up.

Anthony Lebiedzinski — Sidoti & Company — Analyst

Got it, okay. And as far as your advertising strategy, how should we think about that as far as how aggressive do you want to be with promoting the brand? I know you’re doing some TV ads now. So, just wanted to get a sense as to how should we think about, your advertising strategy, new customer acquisition costs? That would be very helpful, thank you.

Menderes Akdag — President, Chief Executive Officer and Director

We’ll be aggressive during peak season. We are working on optimizing our marketing. And our budget is flexible depending on ROI. And as far as the demand is strong, we’ll be aggressive.

Anthony Lebiedzinski — Sidoti & Company — Analyst

Got it. All right. Thank you and best of luck.

Menderes Akdag — President, Chief Executive Officer and Director

Thank you.

Operator

Thank you. [Operator Instructions] And next we have Ben Rose from Battle Road Research. Your line is open.

Ben Rose — Battle Road Research — Analyst

Good morning and glad to hear everything is going well for PetMeds. Couple of questions. Firstly, for Mendo, I understand that this may have been the first quarter that you have rolled out your new e-commerce platform, and was just curious to know if there are any comments you can make relative to how the platform is helping the business?

Menderes Akdag — President, Chief Executive Officer and Director

We still have not rolled out new platform, actually due to the COVID-19, and we got busy and we postponed it at this time.

Ben Rose — Battle Road Research — Analyst

Okay. Is that an indefinite postponement or –?

Menderes Akdag — President, Chief Executive Officer and Director

No, it’s not an indefinite, but we’d like to — we don’t like doing it while we are very busy.

Ben Rose — Battle Road Research — Analyst

Sure. Also wanted to ask you a little bit more about, you had mentioned monitoring the supply chain. I was just curious if that is just kind of a generic concern around being able to be properly stocked by your medication suppliers, or is there — are there any other potential issues there?

Menderes Akdag — President, Chief Executive Officer and Director

Its generic concern and there are sometimes delays to the lead times by a week or two. So, we’re taking that into consideration at this time. But it is a generic concern.

Ben Rose — Battle Road Research — Analyst

Okay. And then if I may, has the current environment necessitated any additional fulfillment workers or have you essentially been working with your current staff through the crisis?

Menderes Akdag — President, Chief Executive Officer and Director

We did increase our staff. We’re using some temporary employees in the distribution center.

Ben Rose — Battle Road Research — Analyst

Okay. All right, thank you very much.

Menderes Akdag — President, Chief Executive Officer and Director

You’re welcome.

Operator

Thank you. And there are no further questions in the queue.

Menderes Akdag — President, Chief Executive Officer and Director

Thank you. In fiscal 2021, we’ll continue focusing on optimizing our marketing in this more competitive environment and being more efficient with our advertising spending. In addition, we will continue investing in our e-commerce platform to better service our customers.

This wraps up today’s conference call. Thank you for joining us. Operator, this ends the conference call.

Operator

[Operator Closing Remarks].